QURATE RETAIL, INC. The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. Additionally, see note 2 in the accompanying consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.
Overview
We own controlling and non-controlling interests in a broad range of video and online commerce companies. Our largest businesses and reportable segments are QxH (QVCU.S. and HSN) andQVC International .QVC, Inc. ("QVC"), which includesQxH andQVC International , markets and sells a wide variety of consumer products inthe United States ("U.S.") and several foreign countries via highly engaging video-rich, interactive shopping experiences.Zulily, LLC ("Zulily") is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day, and is a reportable segment. Our "Corporate and other" category includes our consolidated subsidiaryCornerstone Brands, Inc. ("Cornerstone"), along with various cost and equity method investments. See discussion below for the entities that were included in Corporate and other in prior periods. Prior to the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole.Qurate Retail had two tracking stocks-QVC Group common stock andLiberty Ventures common stock, which were intended to track and reflect the economic performance ofQurate Retail's businesses, assets and liabilities attributed to theQVC Group and theVentures Group , respectively.The QVC Group was comprised of the Company's wholly-owned subsidiaries QVC, Zulily, HSN and Cornerstone among other assets and liabilities.The Ventures Group was comprised of businesses not included in theQVC Group includingEvite, Inc. ("Evite") and our interests in Liberty Broadband Corporation ("Liberty Broadband"), LendingTree, Inc. ("LendingTree"), investments in Charter Communications, Inc. ("Charter") andILG, Inc. ("ILG"), among other assets and liabilities (which were all included in the Corporate and other category). The Company's results are attributed to theQVC Group and theVentures Group throughMarch 9, 2018 . OnMarch 9, 2018 ,Qurate Retail completed the transactions contemplated by the Agreement and Plan of Reorganization (as amended, the "Reorganization Agreement," and the transactions contemplated thereby, the "Transactions") amongGeneral Communication, Inc. ("GCI"), anAlaska corporation, andLiberty Interactive LLC , aDelaware limited liability company and a direct wholly-owned subsidiary ofQurate Retail ("LI LLC "). Pursuant to the Reorganization Agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. ("GCI Liberty")) and effected a reclassification and auto conversion of its common stock. After market close onMarch 8, 2018 ,Qurate Retail's board of directors approved the reattribution of certain assets and liabilities fromQurate Retail's Ventures Group to itsQVC Group , which was effective immediately. The reattributed assets and liabilities included cash,Qurate Retail's interest in ILG, certain green energy investments,LI LLC's exchangeable debentures, and certain tax benefits. Following these events,Qurate Retail acquired GCI Liberty through a reorganization in which certainQurate Retail interests, assets and liabilities attributed to theVentures Group were contributed (the "contribution") to GCI Liberty in exchange for a controlling interest in GCI Liberty.Qurate Retail andLI LLC contributed to GCI Liberty their entire equity interest in Liberty Broadband, Charter, and LendingTree, the Evite operating business and other assets and liabilities attributed toQurate Retail's Venture Group (following the reattribution), in exchange for (a) the issuance toLI LLC of a number of shares of GCI Liberty Class A Common Stock and a number of shares of GCI Liberty Class B Common Stock II-3 Table of Contents equal to the number of outstanding shares ofSeries A Liberty Ventures common stock andSeries B Liberty Ventures common stock onMarch 9, 2018 , respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty. Following the contribution,Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the "GCI Liberty Split-Off"), GCI Liberty, to the holders ofLiberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share ofSeries A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share ofSeries B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. Simultaneous with the closing of the Transactions,QVC Group common stock became the only outstanding common stock ofQurate Retail , and thusQVC Group common stock ceased to function as a tracking stock. OnApril 9, 2018 ,Liberty Interactive Corporation was renamedQurate Retail, Inc. OnMay 23, 2018 ,Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and reclassify each share ofQVC Group common stock into one share of the corresponding series of new common stock ofQurate Retail . Throughout this annual report, we refer to our Series A and Series B common stock as "Qurate Retail common stock" and "QVC Group common stock." InJuly 2018 , the Internal Revenue Service ("IRS") completed its review of the GCI Liberty Split-Off and informedQurate Retail that it agreed with the nontaxable characterization of the transactions.Qurate Retail received an Issue Resolution Agreement from theIRS documenting this conclusion. OnOctober 17, 2018 ,Qurate Retail announced a series of initiatives designed to better position its HSN and QVCU.S. businesses ("QRG Initiatives"). As part of the QRG Initiatives, QVC will close its fulfillment centers inLancaster, Pennsylvania andRoanoke, Virginia and leased a new fulfillment center inBethlehem, Pennsylvania , that commenced in 2019 (see note 8 to the accompanying consolidated financial statements). Expenditures related to the QRG Initiatives are recorded as part of transaction related costs.Qurate Retail recorded transaction related costs of$41 million during the year endedDecember 31, 2018 , which primarily related to severance as a result of the QRG Initiatives. Also, as a result of changes in internal reporting from the QRG Initiatives, during the first quarter of 2019 the Company changed its reportable segments to combine HSN and QVCU.S. into one reportable segment called "QxH." InDecember 2019 , the novel coronavirus ("COVID-19") was reported to have surfaced inWuhan, China and has subsequently spread across the globe causing a global pandemic, impacting all countries whereQurate Retail operates. As a result of the spread of the virus, certain local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the spread, which has caused a significant disruption to most sectors of the economy. In response to these stay at home restrictions, QVC has mandated that non-essential employees work from home, has reduced the number of employees who are allowed on its production set and has implemented increased cleaning protocols, social distancing measures and temperature screenings for those employees who enter into certain facilities. In some cases, the move to a work from home arrangement for QVC's non-essential employees will be permanent, which may result in the reduction of office space. QVC has also mandated that all essential employees who do not feel comfortable coming to work will not be required to do so. As a result of these resource constraints, QVC included fewer hours of live programming on some of its secondary channels and has experienced some delays in shipping at certain fulfillment centers. In certain markets, QVC temporarily increased the wages and salaries for those employees deemed essential who do not have the ability to work from home, including production and fulfillment center employees. QVC has also paid a one-time work from home allowance to its employees during the second quarter of 2020. While the temporary increase in wages and salaries has been terminated in most of QVC's facilities, the inability to control the spread of COVID-19, or the expansion or extension of these stay at home restrictions could negatively impact QVC's results in the future. The stay at home restrictions imposed in response to COVID-19 required many traditional brick and mortar retailers to temporarily close their stores, but allowed distance retailers, including QVC, to continue operating. As a result, beginning at the end ofMarch 2020 , QVC observed an increase in new customers and an increase in demand for certain categories, such as home. However, QVC may not be able to retain these new customers after the pandemic subsides and any increase in demand in its product categories during the pandemic may be temporary. Zulily has seen increased freight surcharges fromChina due to COVID-19 and in concert with QVC has made work accommodations in its fulfillment centers which has resulted in an increase in labor expense. Zulily has also incurred additional expenses to deep cleanse its fulfillment centers and office buildings, coupled with a work-from-home allowance II-4
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to reimburse its employees for home office and associated technology costs as a result of COVID-19. In addition, Zulily management cut all travel expenses, and reduced capital expenditures due to uncertainty created by COVID-19. In addition, there are several potential adverse impacts of COVID-19 that could cause a material negative impact to the Company's financial results, including our capital and liquidity. These include governmental restrictions on the Company's ability to continue to operate under stay at home restrictions and produce content, reduced demand for products sold, decreases in the disposable income of existing and potential new customers, the impacts of any recession and other uncertainties with respect to the continuity of government stimulus programs implemented in response to COVID-19, increased currency volatility resulting in adverse currency rate fluctuations, higher unemployment, labor shortages, an adverse impact to our supply chain and shipping disruptions for both the products we import and purchase domestically and the products the Company sells, including essential products experiencing higher demand due to factory closures, labor shortages and other resource constraints. While the impact is currently uncertain, the inability to control the spread of COVID-19 could cause any one of these adverse impacts, or combination of adverse impacts, to have a material impact on the Company's financial results. Further, the extent of the impact of the COVID-19 pandemic on our businesses remains fluid and the likelihood of an impact on us that could be material increases the longer the virus impacts activity levels in the locations in which we operate. In particular, the widespread distribution, acceptance and effectiveness of vaccines is highly uncertain and cannot be predicted at this time. Delays in the widespread distribution of vaccines, or lack of public acceptance, could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Further, even if vaccines are widely distributed and accepted, there can be no assurance that the vaccines will ultimately be successful in limiting or stopping the spread of COVID-19. Even after the COVID-19 pandemic subsides, theU.S. economy and other major global economies may experience a recession, and we anticipate our businesses and operations could be materially adversely affected by a prolonged recession in theU.S. and other major markets.
Disposals
As a result of the GCI Liberty Split-Off,Qurate Retail viewed LendingTree, Evite and Liberty Broadband as separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off ofQurate Retail's interest in Liberty Broadband had a major effect onQurate Retail's operations. Accordingly,Qurate Retail's interest in Liberty Broadband is presented as a discontinued operation. The disposition of Evite and LendingTree as part of the GCI Liberty Split-Off did not have a major effect onQurate Retail's historical results nor is it expected to have a major effect onQurate Retail's future operations. Accordingly, Evite and LendingTree are not presented as discontinued operations.
Strategies and Challenges
Televised Shopping Businesses. The goal of QVC is to extend its leadership in
video commerce, e-commerce, mobile commerce and social commerce by continuing to
create the world's most engaging shopping experiences, combining the best of
retail, media, and social, highly differentiated from traditional
brick-and-mortar stores or transactional e-commerce. QVC provides customers with
curated collections of unique products, made personal and relevant by the power
of storytelling. QVC curates experiences, conversations and communities for
millions of highly discerning shoppers, and also curates large audiences, across
its many platforms, for its thousands of brand partners.
QVC intends to employ several strategies to achieve these objectives. Among
these strategies are to (i) Curate special products at compelling values;
(ii) Extend video reach and relevance; (iii) Reimagine daily digital discovery;
(iv) Expand and engage its passionate community; and (v) Deliver joyful customer
service. In addition, QVC is exploring opportunities to evolve the International
operating model to pursue growth opportunities in a more leveraged way across
markets.
Future net revenue growth will primarily depend on sales growth from e-commerce,
mobile platforms and applications via streaming video, additions of new
customers from households already receiving QVC's broadcast programming, and
increased spending from existing customers. Future net revenue may also be
affected by (i) the willingness of cable television and direct-to-home satellite
system operators to continue carrying QVC's programming
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services; (ii) QVC's ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand and internet video services; (iv) QVC's ability to source new and compelling products; and (v) general economic conditions. InJuly 2020 , QVC implemented a planned workforce reduction with the goal of making the organizational structure streamlined and more efficient. As part of the workforce reduction, QVC has decided to eliminate live hours on QVC2 in theU.S. and other secondary channels within the international segment. The current economic uncertainty in various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for their products and services since a substantial portion of their revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets have recently experienced disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions inthe United States ("U.S.") or other key markets, includingJapan andEurope , continue to be uncertain or deteriorate, customers may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue. Accordingly, our businesses' ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit QVC's expansion into new European and other markets. The Company is currently unable to predict the extent of any of these potential adverse effects. The Brexit process and negotiations have created political and economic uncertainty, particularly in theU.K. and the E.U., and this uncertainty may last for years. OnJune 23, 2016 , theU.K. held a referendum in which voters approved, on an advisory basis, an exit from the E.U. TheU.K. formally left the E.U. onJanuary 31, 2020 . This has resulted in a transition period that ran untilDecember 31, 2020 . OnJanuary 1, 2021 , theU.K. left theE.U. Customs Union and Single Market, as well as all E.U. policies and international agreements. OnDecember 24, 2020 , theEuropean Commission reached a trade agreement with theU.K. on the terms of its future cooperation with the E.U. (the "Trade Agreement"). The Trade Agreement offersU.K. and E.U. companies preferential access to each other's markets, ensuring imported goods that satisfy applicable point of origin rules (that is, thatU.K. or E.U. goods are wholly produced or significantly worked in theU.K. or E.U., as applicable) will be free of tariffs and quotas; however, economic relations between theU.K. and the E.U. will now be on more restrictive terms than existed previously. For example, packages sent to and from theU.K. , will need to satisfy new customs requirements and obtain applicable transit documents which may result in delays exporting items to customers outside of theU.K. and delays importing products into theU.K. that are shipped to QVC by its vendors. At this time, QVC cannot predict that the Trade Agreement and any future agreements on economic relations between theU.K. and the E.U. will have on its businesses and its customers, and it is possible that new terms may adversely affect QVC's operations and financial results. There is uncertainty as to the actions that may be taken under a newBiden Administration with respect toU.S. trade policy withChina . The imposition of any newU.S. tariffs on Chinese imports or the taking of other actions againstChina in the future, and any responses byChina , could impair QVC's ability to meet customer demand and could result in lost sales or an increase in its cost of merchandise, which would have a material adverse impact on its business and results of operations. Zulily. Zulily's goal is to be part of its customers' daily routine, allowing them to visit Zulily sites and discover a selection of fresh, new and affordable merchandise curated for them every morning. Zulily intends to employ the following strategies to achieve these goals and objectives: (i) acquire new customers; (ii) increase customer loyalty and repeat purchasing; (iii) add new vendors and strengthen existing vendor relationships; (iv) invest in mobile platform and channels with which its customers want to engage; and (v) invest in low cost supply chain systems in theU.S. and cross border. Zulily has limited contractual assurances of continued supply, pricing or access to new products, and vendors could change the terms upon which they sell to Zulily or discontinue selling to Zulily for future sales at any time. As Zulily grows, continuing to identify a sufficient number of new emerging brands and smaller boutique vendors may become more and more of a challenge. If Zulily is not able to identify and effectively promote these new brands, it may lose customers to competitors. Even if Zulily identifies new vendors, it may not be able to purchase desired merchandise in sufficient quantities or on acceptable terms in the future, and products from alternative sources, if any, may be
of a
lesser quality or
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more expensive than those from existing vendors. An inability to purchase suitable merchandise on acceptable terms or to source new vendors could have an adverse effect on Zulily's business.
To support its large and diverse base of vendors and its flash sales model that requires constantly changing products, Zulily must incur costs related to its merchandising team, photography studios and creative personnel. As Zulily grows, it may not be able to continue to expand its product offerings in a cost-effective manner. In addition, the variety in size and sophistication of Zulily's vendors presents different challenges to its infrastructure and operations. Zulily's emerging brands and smaller boutique vendors may be less experienced in manufacturing and shipping, which may lead to inconsistencies in quality, delays in the delivery of merchandise or additional fulfillment cost. Zulily's larger national brands may impose additional requirements or offer less favorable terms than smaller vendors related to margins and inventory ownership and risk and may also be unable to ship products timely.
Results of Operations-Consolidated
General. We provide in the tables below information regarding our Consolidated
Operating Results and Other Income and Expense, as well as information regarding
the contribution to those items from our principal reportable segments. The
"Corporate and other" category consists of our consolidated subsidiary
Cornerstone, along with various cost and equity method investments. For a more
detailed discussion and analysis of the financial results of the principal
reporting segments, see "Results of Operations - Businesses" below.
Operating Results
Years ended December 31,
2020 2019 2018
amounts in millions
Revenue
QxH $ 8,505 8,277 8,544
QVC International 2,967 2,709 2,738
Zulily 1,636 1,571 1,817
Corporate and other 1,070 901 973
Inter-segment eliminations (1) - (2)
Consolidated Qurate Retail $ 14,177 13,458 14,070
Operating Income (Loss)
QxH $ 1,128 973 1,161
QVC International 439 354 351
Zulily (12) (1,091) (95)
Corporate and other 17 (52) (93)
Consolidated Qurate Retail $ 1,572 184 1,324
Adjusted OIBDA
QxH $ 1,547 1,536 1,630
QVC International 510 446 429
Zulily 83 48 108
Corporate and other 58 (1) (13)
Consolidated Qurate Retail $ 2,198 2,029 2,154
Revenue. Our consolidated revenue increased 5.3% and decreased 4.3% for the
years ended
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QVC International , QxH and Zulily revenue increased$258 million ,$228 million , and$65 million , respectively, during the year endedDecember 31, 2020 , as compared to the same period in the prior year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Corporate and other revenue increased$169 million for the year endedDecember 31, 2020 , as compared to the corresponding period in the prior year due to an increase in Cornerstone revenue of$169 million as a result of strong customer response in the home category due to increased demand for home furnishings, interior décor and outdoor living items. QxH,Zulily andQVC International revenue decreased$267 million ,$246 million and$29 million during the year endedDecember 31, 2019 compared to the same period in the prior year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Corporate and other revenue decreased$72 million for the year endedDecember 31, 2019 , as compared to the corresponding prior year period due to a decrease in Cornerstone revenue of$70 million due to the shutdown of one of the home brands in Cornerstone's portfolio during the fourth quarter of 2018.
Operating income (loss). Our consolidated operating income increased
Zulily operating losses decreased$1,079 million for the year endedDecember 31, 2020 , as compared to the corresponding prior year period, primarily due to no impairment of intangible assets at Zulily compared to the impairment taken in the prior year.QxH andQVC International operating income increased$155 million and$85 million , respectively, for the year endedDecember 31, 2020 , compared to the same period in the prior year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Operating income for Corporate and other improved$69 million for the year endedDecember 31, 2020 , as compared to the corresponding period in the prior year, due to a reduction in operating losses at Cornerstone as a result of strong home category revenue and product margin performance. Zulily operating losses increased$996 million for the year endedDecember 31, 2019 , as compared to the corresponding prior year period, primarily due to the impairment of intangible assets at Zulily during the third quarter of 2019.
QxH
andQVC International operating income decreased$188 million and increased$3 million , respectively, for the year endedDecember 31, 2019 , as compared to the corresponding prior year period. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Operating losses for Corporate and other improved$41 million for the year endedDecember 31, 2019 , as compared to the corresponding prior year period, primarily due to a reduction in operating losses at Cornerstone as a result of the shutdown of one of the home brands in Cornerstone's portfolio during the fourth quarter of 2018, along with the elimination of corporate costs at theLiberty Ventures Group due to the GCI Liberty Split-Off in 2018. Adjusted OIBDA. To provide investors with additional information regarding our financial results, we also disclose Adjusted OIBDA, which is a non-GAAP financial measure. We define Adjusted OIBDA as operating income (loss) plus depreciation and amortization, stock-based compensation, separately reported litigation settlements, transaction related costs (including restructuring, integration, and advisory fees) and impairments. Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses by identifying those items that are not directly a reflection of each business' performance or indicative of ongoing business trends. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flows provided by operating activities and other measures of financial performance prepared in accordance withU.S. generally accepted accounting principles. II-8 Table of Contents The following table provides a reconciliation of Operating income (loss) to Adjusted OIBDA. Year ended December 31, 2020 2019 2018 amounts in millions Operating income (loss)$ 1,572 184 1,324
Depreciation and amortization 562 606 637 Stock-based compensation
64 71 88
Impairment of intangible assets - 1,167 33 Transaction related costs
- 1 72
Adjusted OIBDA $ 2,198 2,029 2,154
Consolidated Adjusted OIBDA increased $169 million and decreased $125 million
for the years ended December 31, 2020 and 2019, respectively, as compared to the
corresponding prior year periods.
QVC International , Zulily and QxH Adjusted OIBDA increased $64 million , $35
million and $11 million for the year ended December 31, 2020 , respectively, as
compared to the corresponding prior year period. See "Results of Operations -
Businesses" below for a more complete discussion of the results of operations of
QVC and Zulily. Corporate and other Adjusted OIBDA increased $59 million for
the year ended December 31, 2020 , as compared to the corresponding period in the
prior year due to higher Adjusted OIBDA at Cornerstone due to strong home
category revenue and product margin performance.
QxH and Zulily Adjusted OIBDA decreased $94 million and $60 million ,
respectively, for the year ended December 31, 2019 , as compared to the same
period in the prior year. QVC International Adjusted OIBDA increased $17
million for the year ended December 31, 2019 , as compared to the same period in
the prior year, primarily due to the closure of QVC's operations in France in
March of 2019. Adjusted OIBDA losses related to QVC France were $6 million and
$32 million for the years ended December 31, 2019 and December 31, 2018 ,
respectively. See "Results of Operations - Businesses" below for a more complete
discussion of the results of operations of QVC and Zulily. Corporate and other
Adjusted OIBDA increased $12 million for the year ended December 31, 2019 , as
compared to the corresponding period in the prior year due to higher Adjusted
OIBDA at Cornerstone due to the impacts of the shutdown of one of the home
brands in Cornerstone's portfolio discussed above and improved performance in
the businesses' home segment, and the elimination of corporate costs at the
Liberty Ventures Group due to the GCI Liberty Split-Off.
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
Years ended December 31,
2020 2019 2018
amounts in millions
Interest expense $ (408) (374) (381)Share of earnings (losses) of affiliate, net (156)
(160) (162) Realized and unrealized gains (losses) on financial instruments, net
(110) (251) 76
Gains (losses) on transactions, net 224 (1) 1
Tax sharing income (expense) with Liberty Broadband (39) (26) 32 Other, net (32) 6 (7) Other income (expense)$ (521) (806) (441)
Interest expense. Interest expense increased
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senior secured notes, which have higher interest rates, as well as dividends incurred and paid related to the Preferred Stock during the period recorded through interest expense due to the accounting treatment, partially offset by lower outstanding debt balances due to repayment of amounts outstanding on QVC's senior secured credit facility. The decrease for the year endedDecember 31, 2019 is due to lower average debt balances during 2019 compared to the prior year as well as a reduction in the variable interest rate on QVC's bank credit facilities compared to the prior year. Share of earnings (losses) of affiliates. Share of losses of affiliates decreased$4 million and$2 million during the years endedDecember 31, 2020 and 2019, respectively, as compared to the corresponding prior year periods. The decrease in 2020 is due to fewer losses related to the Company's alternative energy solutions entities compared to the prior year, almost completely offset by an increase in share of losses due to an other than temporary impairment of QVC'sChina equity method investment. The decrease in 2019 was due to the fact that the prior year included losses related to the Company's former investment inFTD Companies, Inc. ("FTD"), partially offset by increased losses at the Company's alternative energy solution entities due to continued investment in such ventures. These entities typically operate at a loss and the Company records its share of such losses but have favorable tax attributes and credits, which are recorded in the Company's tax accounts. Realized and unrealized gains (losses) on financial instruments. Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following: Years ended December 31, 2020 2019 2018 amounts in millions Equity securities$ (1) (22) 155 Exchangeable senior debentures (277) (337) (3) Indemnification asset 143 123 (70) Other financial instruments 25 (15) (6)$ (110) (251) 76 The changes in these accounts are due primarily to market factors and changes in the fair value of the underlying stocks or financial instruments to which these relate. The decrease in losses for the year endedDecember 31, 2020 as compared to the corresponding prior year period was primarily due to a decrease in unrealized losses on the Company's exchangeable senior debentures driven by less growth in stock prices of the securities underlying the debentures than the prior year, a decrease in unrealized losses related to derivative instruments, a decrease in unrealized losses related to equity securities, and an increase in unrealized gains on the indemnification asset. The decrease for the year endedDecember 31, 2019 as compared to the corresponding prior year period was primarily driven by a decrease in the unrealized gain on the investment in Charter and the contribution of Charter shares to GCI Liberty in the GCI Liberty Split-Off, a decrease in unrealized gains on the investment in ILG due to the purchase of ILG by Marriott Vacations Worldwide during the third quarter of 2018 and subsequent sale of this investment, and an increase in unrealized losses on exchangeable debt, partially offset by an unrealized gain on the indemnification asset as a result of the GCI Liberty Split-Off. Gains (losses) on transactions, net. Gains on transactions, net, increased$225 million and decreased$2 million for the years endedDecember 31, 2020 and 2019, respectively, as compared to the corresponding prior year periods. The increase in gain on transactions, net for the year endedDecember 31, 2020 is due the sale of one of the Company's alternative energy investments during the third quarter of 2020. The Company received total cash consideration of$272 million and recorded a gain of$224 million on the sale of the alternative energy investment. Tax sharing income (expense) with Liberty Broadband. Due to the GCI Liberty Split-Off, the Company entered into a tax sharing agreement with GCI Liberty, which was assumed by Liberty Broadband in the fourth quarter of 2020 due to a merger between the companies. As a result, the Company recognized tax sharing expense of$39 million and$26 million for the years endedDecember 31, 2020 and 2019, respectively, and tax sharing income of$32 million for the year endedDecember 31, 2018 .
Other, net. Other, net decreased
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December 31, 2020 , as compared to the same period in the prior year, is
primarily due to a loss on extinguishment of debt of $40 million primarily
related to the retirement of the QVC 5.125% Senior Secured Notes due 2022. The
activity captured in Other, net is primarily attributable to gains (losses) on
early extinguishment of debt, foreign exchange gains (losses) and interest
income.
Income taxes. The Company had an income tax benefit of $211 million , an income
tax benefit of $217 million and income tax expense of $60 million for the years
ended December 31, 2020 , 2019 and 2018, respectively. Our effective tax rate
for the years ended December 31, 2020 , 2019 and 2018 was 20.1%, 34.9% and 6.8%
respectively. For the year ended December 31, 2020 , the Company recorded an
income tax benefit. The current year tax benefit was primarily driven by the
impacts of a corporate realignment and tax credits generated by alternative
energy investments. See notes 7 and 9 to the accompanying consolidated
financial statements for more information related to the corporate realignment.
In 2019 the effective tax rate was higher than the U.S. federal tax of 21%
primarily due to tax benefits from tax credits and incentives generated by our
alternative energy investments and tax benefits from losses generated in 2019
that were eligible for carryback to tax years with federal income tax rates
greater than the U.S. statutory tax rate of 21%, partially offset by a goodwill
impairment that is not deductible for tax purposes and an increase in the
valuation allowance against certain deferred tax assets. In 2018 the effective
tax rate was lower than the U.S. federal tax of 21% primarily due to tax
benefits from tax credits and incentives generated by our alternative energy
investments, a reduction in the Company's state effective tax rate used to
measure deferred taxes resulting from the GCI Liberty Split-Off in March 2018 ,
and a reduction in the Company's state effective tax rate used to measure
deferred taxes resulting from a state law change during the second quarter.
Net earnings (loss). We had net earnings of $1,262 million , net losses of $405
million , and net earnings of $964 million for the years ended December 31, 2020 ,
2019 and 2018, respectively. The change in net earnings (loss) was the result of
the above-described fluctuations in our revenue, expenses and other gains and
losses.
Liquidity and Capital Resources
As ofDecember 31, 2020 substantially all of our cash and cash equivalents are invested inU.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other highly rated financial and corporate debt instruments. The following are potential sources of liquidity: available cash balances, equity issuances, dividend and interest receipts, proceeds from asset sales, debt (including availability under QVC's bank credit facilities, as discussed in note 7 of the accompanying consolidated financial statements), and cash generated by the operating activities of our wholly-owned subsidiaries. Cash generated by the operating activities of our subsidiaries is only a source of liquidity to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted such as, in the case of QVC and Zulily, due to a requirement that a leverage ratio (calculated in accordance with the terms of the document governing such indebtedness which was an exhibit to the Annual Report on Form 10-K for the year endedDecember 31, 2019 ) of less than 3.5 must be maintained. As ofDecember 31, 2020 the Company's leverage ratio was 2.0. During the year, the Company's issuer debt credit rating was lowered from BB to BB- and QVC's issue-level rating on secured debt was lowered from BBB- to BB+ byS&P Global Ratings . All other credit ratings remained unchanged.Qurate Retail and its subsidiaries are in compliance with their debt covenants as ofDecember 31, 2020 . II-11 Table of Contents As ofDecember 31, 2020 ,Qurate Retail's liquidity position consisted of the following: Cash and cash equivalents amounts in millions QVC $ 682 Zulily 6 Corporate and other 118 Total Qurate Retail $ 806 To the extent that the Company recognizes any taxable gains from the sale of assets, we may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds. Additionally, we have$2.93 billion available for borrowing under the QVC Bank Credit Facility atDecember 31, 2020 . As ofDecember 31, 2020 , QVC had approximately$380 million of cash and cash equivalents held in foreign subsidiaries that is available for domestic purposes with no significant tax consequences upon repatriation to theU.S. QVC accrues taxes on the unremitted earnings of its international subsidiaries. Approximately 63% of this foreign cash balance was that ofQVC Japan . QVC owns 60% ofQVC Japan and shares all profits and losses with the 40% minority interest holder, Mitsui & Co, LTD. Additionally, our operating businesses have generated, on average, more than$1 billion in annual cash provided by operating activities over the prior three years and we do not anticipate any significant reductions in that amount in
future periods.
Years ended December 31,
2020 2019 2018
Cash Flow Information amounts in millions
Net cash provided (used) by operating activities
47
Net cash provided (used) by financing activities
During the year endedDecember 31, 2020 ,Qurate Retail's primary uses of cash were payment of cash dividends to common stockholders of$1.3 billion , net debt repayments of$779 million , capital expenditures of$257 million , investments in and loans to equity method investments of$119 million and repurchases of common stock of$70 million , partially offset by proceeds from dispositions of investments of$271 million , which primarily related to the sale of an investment in an alternative energy company accounted for as an equity method investment. The projected uses ofQurate Retail's cash in the next year, outside of normal operating expenses (inclusive of tax payments), are the costs to service outstanding debt,$344 million for estimated interest payments on outstanding debt, including corporate level and other subsidiary debt, anticipated capital improvement spending of approximately$270 million , the repayment of certain debt obligations, the potential buyback of common stock under the approved share buyback program, payment of dividends to the holders of the Preferred Stock, other forms of capital returns to investors and additional investments in existing or new businesses. The Company also may be required to make net payments of income tax liabilities to settle items under discussion with tax authorities. The Company expects that cash on hand and cash provided by operating activities in future periods and outstanding borrowing capacity will be sufficient to fund projected uses of cash.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In connection with agreements for the sale of assets by our company, we may
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
purchaser that relates to a liability retained by us. These types of
indemnification obligations may extend for a number of years. We are unable to
estimate the maximum potential liability for these types of indemnification
obligations as the sale agreements may not specify a maximum amount and the
amounts are dependent upon the outcome of future contingent events, the nature
and likelihood of which cannot be
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determined at this time. Historically, we have not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.
We have contingent liabilities related to legal and tax proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible we may incur losses upon conclusion of such matters, an estimate of any
loss or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying consolidated
financial statements.
Information concerning the amount and timing of required payments, both accrued
and off-balance sheet, under our contractual obligations, excluding uncertain
tax positions as it is undeterminable when payments will be made, is summarized
below.
Payments due by period
Less than After
Total 1 year 2 - 3 years 4 - 5 years 5 years
amounts in millions
Consolidated contractual obligations
Long-term debt (1) $ 6,654 11 772 1,224 4,647
Interest payments (2) 4,695 344 682 548 3,121
Finance and operating lease obligations 700 106 184 130 280
Preferred Stock (3) 2,277 100 200 200 1,777
Purchase orders and other obligations (4) 2,922 2,848
51 13 10
Total $ 17,248 3,409 1,889 2,115 9,835
Amounts are reflected in the table at the outstanding principal amount,
assuming the debt instruments will remain outstanding until the stated
maturity date, and may differ from the amounts stated in our consolidated
(1) balance sheet to the extent debt instruments (i) were issued at a discount or
premium or (ii) have elements which are reported at fair value in our
consolidated balance sheets. Amounts do not assume additional borrowings or
refinancings of existing debt.
Amounts (i) are based on our outstanding debt at
(2) assume the interest rates on our variable rate debt remain constant at the
maturity.
This amount reflects the annual 8.0% dividend on shares of Preferred Stock
(3) outstanding as of
(4) Amounts include open purchase orders for inventory and non-inventory
purchases along with other contractual obligations.
Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Listed below are the
accounting estimates that we believe are critical to our financial statements
due to the degree of uncertainty regarding the estimates or assumptions involved
and the magnitude of the asset, liability, revenue or expense being reported.
All of these accounting estimates and assumptions, as well as the resulting
impact to our financial statements, have been discussed with the audit committee
of our board of directors.
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Fair Value Measurements
Financial Instruments. We record a number of assets and liabilities in our consolidated balance sheets at fair value on a recurring basis, including equity securities, financial instruments and our exchangeable senior debentures. GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. We use quoted market prices, or Level 1 inputs, to value our Fair Value Option (as defined below) securities. As ofDecember 31, 2020 and 2019, we had no Level 1 Fair Value Option securities. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. We use quoted market prices to determine the fair value of our exchangeable senior debentures. However, these debentures are not traded on active markets as defined in GAAP, so these liabilities fall in Level 2. As ofDecember 31, 2020 , the principal amount and carrying value of our exchangeable debentures were$1,412 million and$1,750 million , respectively.
Level 3 inputs are unobservable inputs for an asset or liability. We currently have no Level 3 financial instrument assets or liabilities.
Non-Financial Instruments. Our non-financial instrument valuations are primarily comprised of our annual assessment of the recoverability of our goodwill and other nonamortizable intangible assets, such as tradenames and our evaluation of the recoverability of our other long-lived assets upon certain triggering events, and our determination of the estimated fair value allocation of net tangible and identifiable intangible assets acquired in business combinations. If the carrying value of our long-lived assets exceeds their undiscounted cash flows, we are required to write the carrying value down to fair value. Any such writedown is included in impairment of long-lived assets in our consolidated statements of operations. A high degree of judgment is required to estimate the fair value of our long-lived assets. We may use quoted market prices, prices for similar assets, present value techniques and other valuation techniques to prepare these estimates. We may need to make estimates of future cash flows and discount rates as well as other assumptions in order to implement these valuation techniques. Due to the high degree of judgment involved in our estimation techniques, any value ultimately derived from our long-lived assets may differ from our estimate of fair value. As each of our operating segments has long-lived assets, this critical accounting policy affects the financial position and results of operations of each segment.
As of
Goodwill Tradenames Total
amounts in millions
QxH $ 5,228 2,878 8,106
QVC International 921 - 921
Zulily 477 290 767
Corporate and other 12 - 12
$ 6,638 3,168 9,806
We perform our annual assessment of the recoverability of our goodwill and other
non-amortizable intangible assets during the fourth quarter of each year, or
more frequently, if events or circumstances indicate impairment may have
occurred. We utilize a qualitative assessment for determining whether a
quantitative goodwill and other non-amortizable intangible asset impairment
analysis is necessary. The accounting guidance permits entities to first assess
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the quantitative goodwill
impairment test. In evaluating goodwill on a qualitative basis the Company
reviews the business performance of each reporting unit and evaluates other
relevant factors as identified in the relevant accounting guidance to determine
whether it is more likely than not that an indicated impairment exists for any
of our reporting units. The Company considers whether there are any negative
macroeconomic conditions, industry specific conditions, market changes,
increased competition, increased costs in doing business, management challenges,
the legal environments and how these factors might impact company specific
performance in future periods. As part of the analysis the Company also
considers fair value determinations for certain
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reporting units that have been made at various points throughout the current and prior years for other purposes. In 2019, an impairment of$440 million was recorded to Zulily's goodwill. There were no goodwill impairments in 2020 and 2018. In 2019 and 2018, impairments of$147 million and$30 million , respectively, were recorded to HSN's tradenames. Also in 2019, an impairment of$580 million was recorded to Zulily's tradename. There were no impairments of other intangible assets in 2020. Retail Related Adjustments and Allowances. QVC records adjustments and allowances for sales returns, inventory obsolescence and uncollectible receivables. Each of these adjustments is estimated based on historical experience. Sales returns are calculated as a percent of sales and are netted against revenue in our consolidated statements of operations. For the years endedDecember 31, 2020 , 2019 and 2018, sales returns represented 15.6%, 17.3% and 17.4% of QVC's gross product revenue, respectively. The inventory obsolescence reserve is calculated as a percent of QVC's inventory at the end of a reporting period based on, among other factors, the average inventory balance for the preceding 12 months and historical experience with liquidated inventory. The change in the reserve is included in cost of retail sales in our consolidated statements of operations. As ofDecember 31, 2020 , QVC's inventory was$1,119 million , which was net of the obsolescence reserve of$170 million . As ofDecember 31, 2019 , inventory was$1,214 million , which was net of the obsolescence reserve of$145 million . QVC's allowance for credit losses is calculated as a percent of accounts receivable at the end of a reporting period, and the change in such allowance is recorded as a provision for credit losses in Selling, general, and administrative ("SG&A") expenses in our consolidated statements of operations. As ofDecember 31, 2020 , QVC's trade accounts receivable were$1,602 million , net of the allowance for credit losses of$124 million . As ofDecember 31, 2019 , trade accounts receivable were$1,813 million , net of the allowance for credit losses of$123 million . Each of these estimates requires management judgment and may not reflect actual results. Income Taxes. We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. This process requires our management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions that we enter into. Based on these judgments we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realizability of future tax benefits. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate, our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year's liability by taxing authorities. These changes could have a significant impact on our financial position.
Results of Operations-Businesses
QVC
QVC is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs, the Internet and mobile applications. In theU.S. , QVC's televised shopping programs, including live and recorded content, are broadcast across multiple channels nationally on a full-time basis, including QVC, QVC 2, QVC 3, HSN and HSN2. QxH programming is also available on its websites (QVC.com and HSN.com); virtual multichannel video programming distributors (including Hulu + Live TV, AT&T TV and as ofJanuary 2021 , YouTube TV); applications via streaming video (Facebook Live, Roku, Apple TV and Amazon Fire); mobile applications; social pages and over-the-air broadcasters. QVC's digital platforms enable consumers to purchase goods offered on its broadcast programming, along with a wide assortment of products that are available only on QVC'sU.S. websites. These websites and QVC's other digital platforms (including mobile applications, social pages, and others) are natural extensions of its business model, allowing customers to engage in its shopping experience wherever they are, with live or on-demand content customized to the device they are using. In addition to offering video content, QVC'sU.S. websites allow shoppers to browse, research, compare and perform targeted searches for products, read customer reviews, control the order-entry process and conveniently access their account. II-15 Table of Contents QVC's international televised shopping programs, including live and recorded content, are distributed to households outside of theU.S. , primarily inGermany ,Austria ,Japan , theUnited Kingdom ("U.K."), theRepublic of Ireland andItaly . In some of the countries where QVC operates, its televised shopping programs are broadcast across multiple QVC channels: QVC Style and QVC2 inGermany and QVC Beauty, QVC Extra, and QVC Style in theU.K. Similar to theU.S. , QVC's international businesses also engage customers via websites, mobile applications, and social pages. QVC's international business employs product sourcing teams who select products tailored to the interests of each local market.
QVC's operating results were as follows:
Years ended December 31,
2020 2019 2018
amounts in millions
Net revenue $ 11,472 10,986 11,282
Cost of sales (7,418) (7,148) (7,248)
Operating expenses (786) (768) (881) SG&A expenses (excluding stock-based compensation and transaction related costs)
(1,211) (1,088) (1,094)
Adjusted OIBDA 2,057 1,982 2,059
Impairment of intangible assets - (147) (30)
Stock-based compensation (37) (39) (46)
Depreciation and amortization (453) (468) (411)
Transaction related costs - (1) (60)
Operating income $ 1,567 1,327 1,512
Net revenue was generated from the following geographical areas:
Years ended December 31,
2020 2019 2018
amounts in millions
QxH $ 8,505 8,277 8,544$ 11,472 10,986 11,282 QVC's consolidated net revenue increased 4.4% and decreased 2.6% for the years endedDecember 31, 2020 and 2019, respectively, as compared to the corresponding prior years. The 2020 increase of$486 million in net revenue was primarily comprised of a 2.6% increase in units sold, a$172 million decrease in estimated product returns, primarily driven by QxH, a$22 million increase in shipping and handling revenue across all markets exceptItaly and$54 million in favorable foreign exchange rates, which was partially offset by a slight decline in average selling price per unit ("ASP"). The 2019 decrease of$296 million in net revenue was primarily comprised of a 2.7% decrease in units sold,$69 million in unfavorable foreign exchange rates and a$41 million decrease in shipping and handling revenue across all markets, which was partially offset by a 1% increase in ASP driven by the international markets, and a$49 million decrease in estimated product returns, primarily driven by the decrease in sales volume at QxH. During the years endedDecember 31, 2020 and 2019, the changes in revenue and expenses were affected by changes in the exchange rates for the Japanese Yen, the Euro and the U.K. Pound Sterling . In the event theU.S. Dollar strengthens against these foreign currencies in the future, QVC's revenue and operating cash flow will be negatively affected. In discussing QVC's operating results, the term "currency exchange rates" refers to the currency exchange rates QVC uses to convert the operating results for all countries where the functional currency is not theU.S. dollar. QVC calculates the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. Throughout our discussion, we refer to the results of this calculation as II-16 Table of Contents the impact of currency exchange rate fluctuations. When we refer to "constant currency operating results", this means operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better QVC's underlying performance without the effects of currency exchange rate fluctuations. The percentage change in net revenue for QVC inU.S. Dollars and in constant currency was as follows: Year ended December 31, 2020 Year ended December 31, 2019 Foreign Foreign Currency Currency Exchange Exchange U.S. dollars Impact Constant currency U.S. dollars Impact Constant currency QxH 2.8 % - % 2.8 % (3.1) % - % (3.1) % QVC International 9.5 % 2.0 % 7.5 % (1.1) % (2.6) % 1.5 % In 2020, the QxH net revenue increase was primarily due to a 1.8% increase in units shipped, a$171 million decrease in estimated product returns and a$7 million increase in shipping and handling revenue, partially offset by a 1.3% decline in ASP. For the year endedDecember 31, 2020 , QxH experienced shipped sales growth in home and accessories with declines in all other categories. The decrease in estimated product returns was primarily driven by a shift in product mix to lower return rate categories, partially offset by an increase in sales volume. The increase in shipping and handling revenue was primarily driven by the increase in units shipped and fewer promotional offers.QVC-International net revenue growth in constant currency was primarily due to a 4.6% increase in units shipped, driven by increases in units shipped across all markets, a 1.5% increase in ASP, driven by ASP increases inGermany and theU.K. and a$15 million increase in shipping and handling revenue driven by increases in all markets exceptItaly , primarily due to the increase in units shipped.QVC-International experienced shipped sales growth in constant currency in home, beauty and electronics with declines in all other categories. In 2019, the QxH net revenue decrease was primarily due to a 2.8% decrease in units shipped, a 0.5% decrease in ASP, and an$18 million decrease in shipping and handling revenue. This decrease was partially offset by a$65 million decrease in estimated product returns, primarily driven by the decrease in sales volume. QxH experienced shipped sales decline in all categories except electronics. The decrease in net shipping and handling revenue was a result of a decrease in shipping and handling revenue per unit from promotional offers.QVC International net revenue growth in constant currency was primarily due to a 5.1% increase in ASP, including increases in all markets. The increase was partially offset by a decrease of 2.5% in units shipped, primarily driven byGermany , theU.K. , andItaly partially offset by increases inJapan , a$22 million decrease in shipping and handling revenue, primarily in theU.K. , and a$16 million increase in estimated product returns across all markets.QVC International experienced shipped sales growth in constant currency in all categories except electronics and accessories. QVC's cost of sales as a percentage of net revenue was 64.7%, 65.1% and 64.2% for the years endedDecember 31, 2020 , 2019 and 2018, respectively. The decrease in cost of goods sold as a percentage of revenue in 2020 is primarily due to favorable estimated product returns at QxH and strategic promotional and pricing initiatives, which decreased product costs as a percentage of net revenue across QxH,Japan andGermany , which was partially offset by increased fulfillment costs at QxH, primarily related to increased freight charges. The increase in cost of goods sold as a percentage of revenue in 2019 is primarily due to an increase in product fulfillment costs related to a new fulfillment center inBethlehem, Pennsylvania and higher freight costs at QxH. Operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees, and telecommunications expenses. Operating expenses increased$18 million or 2% and decreased$113 million or 13% for the years endedDecember 31, 2020 and 2019, respectively. The increase in 2020 was primarily due to a$15 million increase in customer service expenses, primarily at QxH, a$6 million increase in credit card fees at QxH and to a lesser extent,Japan , and a$5 million increase due to unfavorable exchange rates partially offset by a$6 million decrease in commissions, primarily at QxH and to a lesser extent,Germany and theU.K. , partially offset byJapan . The increase in customer service expenses is primarily driven by increased call volume during the year. The increase in credit card fees is primarily due to increased sales and lower sales penetration of ourU.S. Private Label Credit Cards, II-17
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which do not charge credit card fees. The decrease in commissions is primarily due to increased digital penetration. The decrease in 2019 was primarily due to a$92 million decrease in commissions primarily at QxH, a$13 million decrease in personnel costs, primarily at QxH and to a lesser extent,Italy ,Germany andJapan , and a$5 million decrease due to favorable exchange rates. The decrease in commissions is primarily due to new longer term television distribution rights agreements entered into at HSN, with similar terms to QVC's television distribution agreements, which led to increased capitalization of television distribution rights agreements and favorable terms on commissions. SG&A expenses (excluding stock compensation and transaction related costs as defined below) include personnel, information technology, provision for credit losses, production costs and marketing and advertising expense. Such expenses increased$123 million , and were 10.6% of net revenue for the year endedDecember 31, 2020 as compared to the prior year and decreased$6 million and were 9.9% of net revenue for the year endedDecember 31, 2019 as compared to the prior year. The increase in 2020 was primarily due to a$111 million increase in personnel costs across all markets, a$53 million increase in online marketing primarily at QxH and$7 million in unfavorable exchange rates. These increases were partially offset by a$34 million decrease in estimated credit losses primarily at QxH and to a lesser extent,Japan , a$14 million decline in outside services primarily at QxH and a$10 million decrease in travel expenses across all markets. The increase related to personnel costs was primarily due to an increase to our estimated incentive pay across all markets, and a work from home allowance as a result of COVID-19, which was partially offset by the closure of our operations inFrance in 2019. The decrease to estimated credit losses was due to favorable adjustments based on actual collections, a decrease in the number of installment counts taken by customers, the implementation of fraud screening and a favorable shift in product category mix. The decrease in travel expenses was primarily due to less travel as a result of COVID-19. The decrease in 2019 was primarily due to a$43 million decrease in personnel costs primarily in QxH,France and theU.K. partially offset by increases inJapan ,Germany andItaly , and an$11 million decrease due to favorable exchange rates. The decreases were partially offset by a$22 million increase in outside services, primarily at QxH andJapan , partially offset by a decrease inGermany , a$12 million increase in bad debt expense, and a$16 million increase in online marketing expenses primarily in QxH. The decrease in personnel costs is due to a decrease in wages at QxH as a result of the QRG Initiatives, a decrease in bonus compensation across all markets except forJapan , the termination of a retirement health plan and the closure of QVC's operations inFrance , partially offset by higher severance across all markets. The increase in bad debt expense for the year endedDecember 31, 2019 is primarily due to increasedEasy Pay usage and the number of installments taken at QxH. QVC recorded impairment losses of$147 million and$30 million for the years endedDecember 31, 2019 and 2018, respectively, related to the decrease in the fair value of the HSN indefinite-lived tradename as a result of the quantitative assessment that was performed by the Company in each of those years (see note 6 to the accompanying consolidated financial statements). There was no impairment loss recorded by QVC for the year endedDecember 31, 2020 . QVC recorded$1 million and$60 million of transaction related costs for the years endedDecember 31, 2019 and 2018, respectively. The transaction related costs in 2018 were primarily related to severance payments related to the future closure of QVC'sLancaster, PA fulfillment center and other initiatives to better position its QxH operations as well as the closure of operations inFrance . No transaction related costs were recorded for the year endedDecember 31, 2020 . Stock-based compensation includes compensation related to options and restricted stock granted to certain officers and employees. QVC recorded$37 million ,$39 million and$46 million of stock-based compensation expense for the years endedDecember 31, 2020 , 2019 and 2018, respectively. There was no significant change for 2020. The decrease in 2019 was primarily due to forfeitures of non-vested options from terminated individuals.
Depreciation and amortization decreased
Depreciation and amortization included$66 million ,$66 million and$67 million of acquisition related amortization during the years endedDecember 31, 2020 , 2019, and 2018, respectively. For the year endedDecember 31, 2020 , property and equipment depreciation decreased primarily due to the disposition of assets inFrance in 2019. For the year endedDecember 31, 2019 , channel placement amortization expense increased II-18
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primarily due to new television distribution contracts entered into at HSN and software amortization decreased due to the end of useful lives of certain software additions.
Zulily
Zulily's operating results for the last three years were as follows:
Years ended
December 31, December 31, December 31,
2020 2019 2018
amounts in millions
Net revenue $ 1,636 1,571 1,817
Cost of sales (1,228) (1,179) (1,346)
Operating expenses (44) (42) (50)
SG&A expenses (excluding stock-based
compensation and transaction related
costs) (281) (302) (313)
Adjusted OIBDA 83 48 108
Stock-based compensation (15) (15) (17)
Depreciation and amortization (80) (104) (186)Impairment of intangible assets - (1,020)
-
Operating income (loss) $ (12) (1,091) (95)
Net revenue consists primarily of sales of women's, children's and men's
apparel, children's merchandise and other product categories such as home,
accessories and beauty products. Zulily recognizes product sales at the time all
revenue recognition criteria has been met, which is generally at shipment. Net
revenue represents the sales of these items plus shipping and handling charges
to customers and private label credit card income, net of estimated refunds and
returns, store credits, and promotional discounts. Net revenue is primarily
driven by Zulily's active customers, the frequency with which customers purchase
and average order value.
Zulily's consolidated net revenue increased 4.1% and decreased 13.5% for the
years ended December 31, 2020 and December 31, 2019 , respectively, as compared
to the corresponding prior years. The increase in net revenue for the year ended
December 31, 2020 was primarily attributed to increases of 4.3% in average sale
price and 0.2% in total units shipped driven by increased demand for online
shopping and Zulily's merchandise as a result of stay-at-home orders and the
temporary closure of brick-and-mortar retail due to COVID-19. The decrease in
net revenue for the year ended December 31, 2019 was primarily attributed to a
14.2% decrease in demand.
Zulily's cost of sales as a percentage of net revenue was 75.1%, 75.0% and 74.1%
for the years ended December 31, 2020 , 2019 and 2018, respectively. Cost of
sales as a percentage of net revenue increased for the year ended December 31,
2020 as compared to the year ended December 31, 2019 primarily due to higher
shipping costs and increased wages in the fulfilment centers, partially offset
by favorable product margin. Cost of sales as a percentage of net revenue
increased for the year ended December 31, 2019 as compared to the year ended
December 31, 2018 primarily due to increased shipping costs.
Zulily's operating expenses are principally comprised of credit card processing
fees and customer service expenses. Operating expenses increased for the year
ended December 31, 2020 , as compared to the same period in the prior year,
driven by increased sales volumes. Operating expenses decreased for the year
ended December 31, 2019 , as compared to the same period in the prior year, due
to a decrease in transaction processing fees as a result of decreased net sales.
Zulily's SG&A expenses include personnel related costs for general corporate
functions, marketing and advertising expenses and information technology. As a
percentage of net revenue, SG&A decreased from 19.2% to 17.2% for the year ended
December 31, 2020 as compared to the year ended December 31, 2019 , primarily due
to lower marketing spending and more leverage attributable to the increase in
sales. As a percentage of net revenue, SG&A increased from
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17.2% to 19.2% for the year ended
Zulily's stock-based compensation expense remained flat for the year ended
Zulily's stock-based compensation expense decreased slightly for the year endedDecember 31, 2019 , compared to the corresponding period in the prior year, due to the departures of senior leadership including the Chief Merchant. Zulily's depreciation and amortization expense decreased$24 million and$82 million for the years endedDecember 31, 2020 and 2019, respectively, as compared to the corresponding prior years. The decrease for the year endedDecember 31, 2020 , compared to the same period in the prior year, was primarily due to the amortization of Zulily's customer relationship asset following a utilization pattern assuming greater benefit earlier in the customer relationship life. The decrease for the year endedDecember 31, 2019 , compared to the same period in the prior year, was primarily attributable to intangible assets recognized in purchase accounting that were fully amortized as of the third quarter of 2018.
For discussion of the impairment of intangible assets in 2019, see note 6 of the accompanying consolidated financial statements.
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